39th Edition
January 2, 2024
Thoughts on trickle-down economics
In this edition I thought I would add a few thoughts and hopefully a new perspective on the ongoing controversy surrounding supply-side economics, specifically as it relates to the theory commonly known as trickle-down economics. As is the case with most economic policies in a global economy, this issue is complicated, producing unequal benefits as well as costs.
The basic argument in favor of supply-side economics is that lower taxes and less regulation will result in greater overall economic growth. This enhanced growth will trickle down so to speak, from businesses to individuals, from entrepreneurs and innovators to the working class, and from the wealthy to the middle class and the poor. In short, a rising tide that will lift all boats. Accelerating economic growth does tend to create more jobs and rising income, but not uniformly or equally.
The basic argument against trickle-down economics is that it will produce unbalanced growth and income inequality, as tax cuts will favor the wealthy over the poor. This is essentially true, but every economic policy produces inequity to some degree. If the owner of a business received a 50% increase in overall income while the average employee received a 10% increase, would that not be better than a scenario in which neither received any increase at all? Obviously, the potential scenarios are endless, making it difficult to determine the optimal one, let alone the fairest one. That isn’t a reason not to try, for try we must from a moral perspective.
In terms of tax cuts, it is a mathematical truism that reducing tax rates favors those who pay more taxes over those who pay less or no taxes at all. Therefore, tax cuts do benefit the wealthy more than the poor because the wealthy pay more in taxes. We could, of course, raise taxes instead. Initially, this would have the reverse impact, penalizing the wealthy more than the poor, and reducing income inequality. Would this be a good thing? Again, it’s complicated. Over time, raising taxes would have other consequences which might harm both groups and the economy overall. It all depends on the timing of tax increases, to what extent they are increased, and the subsequent decisions by individual consumers and the business sector. Moreover, how the government spends tax revenues is open to endless debate. For example, some government spending promotes economic growth, while much of it is unproductive, if not downright wasteful. In short, it is complicated, and future impacts from tax increases, or decreases, cannot be predicted accurately by computer models or by extrapolating historical data. It is very difficult to get tax policy right, so to speak. To begin with, “getting it right” means different things to different people. Also, the lag effect makes analyzing the effectiveness of tax policy difficult to measure.
It seems to me that the goal of tax policy, and virtually all other economic policies is to create an environment that benefits the economy and the citizens of our country as broadly as possible. A true rising tide that lifts all boats. We have to realize that inequities are inevitable, but we are called from a moral perspective to minimize them as much as is prudently possible. Moreover, how we attempt to do this matters, especially because the policy pendulum tends to swing too far in both directions. Virtually all government policies solve some current problems, while they create new problems that will need to be addressed in the future. Tax policy is no exception.
The second pillar of supply-side economics is that less regulation is better than too much regulation. Like tax policy, this issue is complicated and getting the ideal balance is very difficult. Too little regulation can produce unfair market conditions, monopolies and can stifle new business formations. Too much regulation can depress economic growth, innovation, and lead to higher inflation. Some regulation is necessary, but the debate about too little or too much will forever be part of the political and economic discussion. There is also a moral perspective to regulation that often gets overlooked. Competing in an ethical manner, embracing its responsibility to the environment and communities in which it operates, is an obligation some businesses embrace, but some shy away from. If more did the former, less regulation would be necessary.
As we contemplate issues related to economic policy, it would be helpful to remember three general rules. One, they are all complicated with unpredictable lag effects. Two, there are always consequences, intended as well as unintended. In this regard, sound-bite rhetoric, like if only the rich would pay their fair share, or all people on welfare just need to get a job, are not at all helpful. Third, we should always be aware that correlation and causation are not the same thing. Biased arguments routinely contend that the former proves the latter, which isn’t always the case.
In addition, it isn’t at all helpful to cherry pick historical data and argue that similar policies today will have the same desired impact, yet this is done too often by both sides. It doesn’t lead to comprehensive and effective solutions, nor the compromise mentality that is required to solve today’s complex problems. All it does is feed the anger and polarization that grips our country.
I keep thinking the best approach to solving issues related to economic growth, wealth creation and inequity, are not top-down, but bottom up. What do I mean by this? Each individual company, whether large or small, can make a difference by how it operates. Those that embrace a servant leadership culture will operate differently than those that don’t. Business leaders who strive to serve others before themselves will be more civic minded, will share the wealth creation more equitably, and over time, will be more successful in their respective industries. This model exists today, it just isn’t as widespread as it needs to be. At the same time, the servant model exists at the individual and community level, too. And it is amazingly impactful. Sharing your knowledge, experience, and wealth to benefit others is infectious. Unfortunately, so is the opposite.
At the core of all this is the ongoing evolution of our country’s dominant culture. In any organization, or even a country, the leaders set the culture. As Gary Bertier said to Julius Campbell in the movie Remember the Titans – Attitude reflect leadership, Captain. So very true. I’ll close with one more quote, this one attributed to John F. Kennedy – One person can make a difference, and everyone should try. Seems reasonable to me…
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